Suntech's downfall may have European origin

Suntech Power, forced to put its Chinese solar unit into bankruptcy last month, began that slide into insolvency in 2009 when customers linked to the founder couldn’t pay their bills and the company booked the sales as revenue anyway, regulatory filings show.

Seven buyers backed by an investment firm funded by Suntech and its founder, Shi Zhengrong, accounted for 29 per cent of Suntech’s uncollected bills as 2009 ended, according to correspondence between the solar company and the US Securities and Exchange Commission. Those customers hadn’t yet received enough money to proceed with their projects and Suntech, once the world’s largest solar-panel maker gave them more time to pay, the letters show.

The SEC correspondence provides clues to Suntech’s prospects and a road map to business practices that left the company vulnerable to a 560 million-euro ($698 million) fraud and a $US541 million bond default. Anyone with Internet access could have learned that Suntech was booking revenue from sales to related companies with unbuilt projects in the fledgling solar industry, while also guaranteeing loans to those related companies. It relied on a former sales agent to secure one guarantee with bonds it never saw.

“Digging through SEC correspondence is one of the most important things an investor should do before investing in any company -- especially in companies that are higher risk or more opaque,” said short seller Carson Block of Muddy Waters LLC, whose analyst reports starting in November 2010 triggered $US7 billion in losses for Chinese stocks in two years.

Default notice

Wall Street investors funneled $US1.28 billion into Suntech, including the bonds and $US742.6 million of stock sales in 2005 and 2009. Last month Suntech said it received a notice of default on the $US541 million bond payment March 15 and agreed with almost two-thirds of the holders to extend the due date to May 15. Analysts including Standard & Poor’s Angelo Zino have said US investors might take big losses.

The solar panel maker’s uncollected bills from related- company projects exceeded sales from those companies by a widening margin. Receivables were $US44.7 million in 2011’s first quarter, against $US33.6 million in revenue booked from the companies, according to filings. Sales dried up in later quarters and uncollected bills remained, filings show.

The bankruptcy of its China unit knocked the Cayman Islands-incorporated parent’s US-listed shares down 16 per cent in two days. The stock, which made founder Shi worth about $US5.2 billion at its 2007 peak of $US88.35, is at 40 cents now, after a glut of solar panels dragged prices down 69 per cent in two years.

Solar billionaire

Shi Zhengrong, an Australian citizen who studied and worked at the University of NSW, founded Suntech in 2002 and took the company public three years later, becoming the world’s first solar billionaire. He obtained credit from the China Development Bank to wrest control of the industry from German and Japanese competitors.

Suntech’s collapse follows bankruptcies in Germany of manufacturers such as Q-Cells SE, previously the biggest solar manufacturer. Sharp Corp. of Japan, which led solar cell-making until 2006, has been scaling back operations overseas. In 2011, Solyndra collapsed in spite of $US535 million of support from the US Energy Department.

The SEC’s first letter to Suntech was in November 2005, and its latest was April 2011. All of its letters were available to the public by mid-June 2011. There were about 38 equity analysts covering Suntech as of July 1, 2011, of whom 31 recommended either holding or buying the stock, data compiled by Bloomberg show.

Outperform rating

For example, Robert W. Stone of Cowen in Boston rated Suntech “outperform” in July 2011 when its price was about $US8. He declined to say if he had read the SEC letters.

Stone said this month that the solar business is consolidating. “The process of bottoming in the industry won’t necessarily be a one-quarter event,” he said.

Suntech’s vehicle for investing in new solar projects in the credit crisis was Luxembourg-registered Global Solar Fund, run by Javier Romero, who was once Suntech’s external sales agent in Spain. Romero persuaded Shi to commit 258 million euros to Global Solar Fund beginning in 2008, eventually giving Suntech an 86 per cent equity stake.

Shi himself committed 32 million euros for almost 11 per cent of the fund, according to SEC correspondence and filings. Suntech wound up with 79 per cent of the fund after giving part of its stake to Romero as an incentive payment, according to filings.

Italian projects

Global Solar Fund invested in seven solar projects, mostly in southern Italy. They became the Suntech customers that had difficulty paying their bills. One of them, Solar Puglia II S.ar.L, required the guarantee of a 554.2 million-euro bank loan from China Development Bank.

Suntech told the SEC that Global Solar Fund backstopped the guarantee with 560 million euros of German government bonds.

Romero assured Suntech that the bonds could be sold at any time to pay China Development Bank if the project defaulted on its debt, Suntech wrote to the regulator. Trouble was: The German bonds Romero promised as a backstop never existed, Suntech said in December after looking for them for four months.

Shi, fired by Suntech’s board on March 4, signed some of Suntech’s letters of response to the SEC. Shi didn’t respond to an e-mail seeking comment on the SEC letters or Suntech’s prospects.

The Suntech founder has been barred from leaving China along with the company’s chief executive officer, David King, while authorities investigate the company’s finances, the Shanghai Securities News said March 22, citing people it didn’t identify. Australia's Department of Foreign Affairs said on March 24 that Shi was not facing travel restrictions.

Romero, who settled a Suntech lawsuit over the bonds without admitting liability, said a prior confidentiality agreement with Suntech restricted him from discussing the bonds.

Suntech said it discovered last year that it couldn’t access the German bonds it thought it had, when it considered selling its Global Solar Fund stake, partly to pay its own debts. The alleged fraud forced it to restate past earnings and erased $US60 million to $US80 million of 2010 net income plus additional amounts in 2011 and the first quarter of 2012, it said.

In November, Suntech told bondholders that it couldn’t predict whether the solar fund could be sold or at what price.

The company had more than $US2 billion in debt when it couldn’t pay its bonds, prompting eight Chinese banks to ask a local court to push Suntech’s main solar unit, based in Wuxi, outside Shanghai, into insolvency on March 20.

Wuxi government

A company owned by the Wuxi municipal government will take over Suntech’s main unit, Wuxi Suntech Power Holdings, Digitimes said, citing unidentified Taiwanese solar-wafer companies. The unit will have limited funds because of regulations, they said.

Suntech, the parent of Wuxi Suntech, “has not commenced insolvency proceedings, nor have any of the company’s other principal operating subsidiaries,” it said last month.

The SEC has said it started an investigation of US-listed Chinese companies’ accounting around mid-2010. In December, it accused affiliates of US accounting firms -- including Deloitte & Touche LLP, Suntech’s auditing firm -- of withholding documents it requested.

SEC spokesman John Nester didn’t respond to an e-mail seeking details of the probe.

In 2010 and 2011, the SEC wanted to know about Romero’s connections with Suntech, including his role as a sales agent. It wanted copies of all contracts Suntech had signed with Romero as agent.

Agent agreements

“Revise future filings to clearly disclose the prior relationship with the general partner of GSF,” it said, referring to Global Solar Fund. “Please supplementally provide us with a copy of any employment, representative or sales agent agreement you have had with Mr. Romero.”

Suntech hasn’t filed audited results with the SEC since announcing the bond fraud in July. In December, disclosing it would restate its earnings, it said an audit of its financial statements should be finished early this year. SEC-mandated disclosures including details on Romero and possible flaws in Suntech’s valuation of the solar fund appeared in the company’s 2010 annual report filed May 2011.

The regulator asked how much Romero had actually sold for the company, and if he had helped Suntech’s market share in Spain.

Sales results

“The company respectfully advises the staff that the agent sold 76.4MW of Suntech solar PV modules during the initial term of the agreement,” Suntech said. “For 2007, the company estimates that its market share of the Spanish Solar PV Module market was approximately 19.7%.” Photovoltaic relates to the conversion of light into electricity. MW, or megawatts, is a measure of how much electricity is produced.

The SEC also wanted to know how Suntech had come to invest in Global Solar Fund, including whether Romero was a party in those discussions.

Suntech told the SEC how Romero, trying to start Global Solar Fund early in 2007, pitched the concept and strategy to Suntech managers, and Shi “expressed initial interest.”

Zeroing in on the Chinese bank’s request for a loan guarantee, the SEC asked, “please explain to us why it was necessary for you to guarantee the debt,” rather than the solar fund.

Credit crisis

Suntech blamed the “global liquidity and credit crisis,” which sent the solar fund to China for money. The lender, China Development Bank, wanted Chinese assets backing its loans, it said.

The SEC asked if the request for the guarantee had changed Suntech’s ideas about getting paid from the project in Italy. Suntech said that it was still appropriate to book revenue from the project and that it was protected by what turned out to be nonexistent bonds.

“Given the company has the ability to access the German government bonds without any restriction in the event of default of the investee companies, the company believes that the likelihood that it will have to satisfy its guarantee, without being immediately compensated under the German government bonds, is remote.”

The investee companies refer to the entities undertaking the projects with backing from Global Solar Fund.

Brandisi prosecutor

A public prosecutor in Brindisi, Italy, has accused some officers of Global Solar Fund subsidiaries of violating local permit rules and building regulations, Suntech said in December. The officers are fighting the charges and Suntech isn’t being targeted in the Italian proceedings, it said.

There’s a lesson in the Suntech bankruptcy for investors in emerging industries, said Standard and Poor’s Zino.

“When you start going from high growth to more mature, not all the players will typically survive,” he said. “We expect to see mass consolidation and bankruptcies. Especially if you’re on the equity side, you’ve got to pay attention.”